A majority of states offer an earned income tax credit, and a recent bill could add Pennsylvania to the list.
The EITC is a subsidy for low-income working families, though childless workers can sometimes benefit from it as well.
“In general, research shows that the EITC encourages single people and primary earners in married couples to work,” an analysis from the Tax Policy Center noted. It works in three phases: as a worker’s income rises, each dollar is matched with a credit, lowering their marginal tax rate. Then the credit maxes out and plateaus, before more income reduces the credit a worker earns, as Robert Bellafiore of the Tax Foundation explained.
Sen. Mario Scavello, R-Scotrun, introduced SB 1082 to create a refundable EITC in Pennsylvania for workers with dependent children that would apply in 2023 with a 10% phase-in and reach 25% by 2031.
“For low-income, working families … a Commonwealth Earned Income Tax Credit will provide much needed assistance with affording child care, food, transportation, clothes and other household expenses,” Scavello wrote in a legislative memo.
The District of Columbia and 28 states have an EITC on the books, according to the Urban Institute. Most are refundable, which means that low-income families receive a payment from the state if their tax credit is more than their state tax liability. As relatively few low-income families have a low or no state tax liability, the EITC functions as an anti-poverty subsidy.
State EITCs tend to be a percentage of the federal EITC and range widely; nearby, Ohio has a 30% nonrefundable EITC and New Jersey has 40% refundable EITC.
“If the EITC were treated like earnings, it would have been the single-most effective anti-poverty program for working-age people, lifting about 5.6 million people out of poverty in 2018,” the Tax Policy Center noted.
The effectiveness of an EITC comes from being well-targeted to benefit low-income workers, both in rural and urban areas, while encouraging workforce participation.
However, it can be complicated for taxpayers to understand and tax officials to run. Improper payments, mainly due to workers incorrectly claiming children, keeps the error rate high on the federal level. Some earners, too, could face a “marriage penalty” and increase their tax burden compared to staying single. Childless workers also benefit much less than similar workers with children.